Texas Overhauls Noncompete Law

The central component of Texas noncompete law that separated it from the pack is that the consideration needed to support a noncompete had to be related to the legitimate business interest sought to be protected by the noncompete. As stated by the Texas Supreme Court in 1994, in Light v. Centel Cellular Co. of Texas, 883 S.W.2d 643, 647 (Tex. 1994), “the consideration given by the employer . . . must give rise to the employer’s interest in restraining the employee from competing . . . .” For example, access to trade secrets could be consideration for a noncompete designed to protect those trade secrets.

Money was not enough. And, the so-called “give rise” requirement narrowed an employer’s ability to protect goodwill, which could not necessarily be given in exchange for the noncompete.

On June 24, 2011, the Texas Supreme Court changed all of that. In Marsh v. Cook, the court considered the history of the “give rise” requirement established by Light v. Centel Cellular Co. of Texas and determined that it contravened Texas’s noncompete statute. The court explained as follows:

[T]he Legislature did not include a requirement in the Act that the consideration for the noncompete must give rise to the interest in restraining competition with the employer. Instead, the Legislature required a nexus—that the noncompete be “ancillary to” or “part of” the otherwise enforceable agreement between the parties. Tex. Bus. & Com. Code §15.50(a). There is nothing in the statute indicating that “ancillary” or “part” should mean anything other than their common definitions. “[A]ncillary means ‘supplementary’ and part means ‘one of several . . . units of which something is composed.’”

Consistent with the court’s elimination of the “give rise” requirement, the court also retreated from another significant restriction imposed by Light. Specifically, the other aspect of Texas law that distinguishes it from other states’ noncompete laws is that in Texas “the covenant [must] be designed to enforce the employee’s promise . . . .” As to this, the court stated, “we re-emphasize that the [Texas noncompete statute] provides for the enforcement of reasonable covenants not to compete.” Such “re-emphasis” is code for “we won’t enforce the requirement when it comes before this court.”

The hallmark of enforcement is whether or not the covenant is reasonable. The enforceability of the covenant should not be decided on “overly technical disputes” of defining whether the covenant is ancillary to an agreement. “Rather, the statute’s core inquiry is whether the covenant ‘contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.’”

The upshot? Texas has just become much more favorable to employers than it has been in the last two decades.

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